ZTE tax case: Concerns raised by court to decide fate of Chinese firms

The Delhi Supreme Court docket has raised some key authorized questions over a tax case between telecom tools provider ZTE Corp. and the earnings tax division, which might have an effect on comparable instances introduced by the tax authorities in opposition to different Chinese language firms as effectively.

The Supreme Court docket, which admitted late final 12 months ZTE‘s enchantment in opposition to the findings of the tax authorities and the order of an appellate physique partially in favor of the corporate requested whether or not taxable earnings may very well be attributed to the everlasting subsidiary of a Chinese language firm in India due to provides from the overseas father or mother firm. If that’s the case, she requested what the diploma of attribution of the revenue may very well be. The courtroom additionally wished to know whether or not a Chinese language firm was entitled to set off prices in opposition to fee to an Indian entity for advertising and marketing companies.

In an earlier enchantment in one other tax evaluation case filed by the corporate in 2017, the Supreme Court docket had requested whether or not the assessing earnings tax officer was justified in setting completely different revenue attribution charges versus these within the Indochinese double taxation settlement.

The questions of legislation formulated by the courtroom are on the coronary heart of the earnings tax evaluation of the native entities of Chinese language firms, together with a few of ZTE’s rival huawei in addition to handset producers Vivo and Xiaomi are managed by Indian authorities. A few of these instances additionally contain switch pricing and fee of royalties to their Chinese language dad and mom, along with how the earnings and earnings have been accounted for in India.

ZTE Corp had been difficult the Revenue Tax Division’s assessments for 2 fiscal years (2016-17 and 2017-18). After the Revenue Tax Appellate Tribunal (ITAT) solely partially awarded the corporate’s problem in June final 12 months, it took it to the Supreme Court docket. The enchantment submitted earlier in 2017 associated to evaluation years 2004-05 to 2009-10. The appeals have but to return earlier than the common therapy.

In accordance with the orders of ITAT and the case in Delhi Excessive Court docket adjudicated, ZTE Corp, through the evaluation years 2016-17 and 2017-18, provided telecommunications tools – community tools, terminal tools and software program – to Indian telecom operators. its subsidiary, ZTE Telecom India Pvt Ltdoffered set up, commissioning and testing companies for the tools provided by the Chinese language father or mother firm.

The tax inspector despatched notices to the corporate for each tax years primarily based on a 2009 investigation performed by the division on the Indian subsidiary’s places of work in Gurgaon and Mumbai. In accordance with the appraiser, varied incriminating paperwork have been discovered and inventoried through the investigation. Statements from senior executives have been additionally recorded.

The paperwork led the reviewing officer to imagine that the Chinese language firm, ZTE Corp, had a enterprise connection in India and that the enterprise was performed by its everlasting facility in India, in response to the order handed by ITAT in June final 12 months. The appraiser claimed tax on this foundation.

With regard to the dispute of “attribution of revenue”, the Chinese language telecom firm primarily based on a 2016 ITAT ruling, during which the tribunal dominated that “virtually all gross sales capabilities together with advertising and marketing, banking and after-sales have been carried out by the everlasting institution in India”.

Within the latter case, the corporate argued earlier than the tribunal that “not one of the actions recognized (by the IT division) associated to the everlasting institution (the Indian department of ZTE) generate earnings and subsequently no a part of the revenues when it comes to such actions in India needs to be taxed”.

It additionally argued that actions recognized by the reviewer, equivalent to negotiation, the place of signature of the contract, formal acceptance of the contract, or normal oversight by the reviewer have been irrelevant elements.

“When the principal exercise of the assessee (ZTE China) is completely different, the incidental actions that are solely supposed to help and assist the principal exercise are topic to the exclusion clause of DTAA (India-China) have a preparatory and supportive character,” argued ZTE’s counsel.

It argued that for the reason that transactions between the valuer and its Indian subsidiary have been already topic to switch pricing, no additional allocation was warranted. The corporate additionally objected to the allocation of 35% of its earnings from software program/expertise companies, calling it “far too excessive” and demanding that or not it’s lowered to twenty%.

ZTE argued that for the reason that sale of software program was inextricably linked to the {hardware} and assuming a everlasting institution of the valuer in India, such income from the sale of software program couldn’t be taxed as royalty.

The tribunal beforehand dominated that “the query of revenue allocation will depend on the information within the specific case and is wholly depending on the extent of exercise of the actions performed in India”. My Place Cafe